Four replies;

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FOUR REPLIES
How do leaders of the financial industry view the nation's
capital needs? Spokesmen from commercial banking, investment
banking, savings and loan, and insurance discuss the causes
and implications of a potential shortage and the problems
their industry faces in helping maintain a flourishing economy.
COMMERCIAL BANKING:
THE TWIN THREATS TO CAPITAL
by W. LIDDON McPETERS, President, American Bankers Association
and President, Security Bank of Corinth, Mississippi
The question of whether or not our
nation is heading for a capita! short-age
is an exceedingly complex one. In
this issue of TEMPO, Dr. Freund deals
with the question in an especially
lucid way. The concerns which he has
expressed from his vantage point in
the securities industry are widely
shared in commercial banking.
About one-fourth of the total
credit outstanding in our economy
comes directly from the more than
14,000 banks in our nation's commer-cial
banking system. Moreover, a sig-nificant
amount of the credit provided
by several other types of lenders is
supported, in part, by bank loans and
commitments.
Commercial banking's contribu-tion
to the annual supply of new
credit fluctuates from year to year, of
course, but over a decade or so, it will
tend to expand its holdings of debt
securities and loans at about the same
pace that total debt has grown in our
economy.
Federal Fiscal Policy
This year-to-year fluctuation in the
volume of credit extended by com-mercial
banks is primarily the result of
(1) changes in the demand for credit
by individuals, businesses, and gov-ernments
and (2) shifts in Federal
Reserve monetary policy. The availa-bility
of bank credit depends on the
ease or tightness of the latter.
Dr. Freund's emphasis on the
important influence of the federal
government in determining whether
or not our nation may experience a
capital shortage is well placed. A
deficit in the federal budget has
important implications with respect
to the demand and supply of capital.
(1) A federal deficit tends to result
in a higher level of spending on
consumption than would exist if
federal revenues and expenditures
were in balance. That is, the total of
taxes and current savings is less than it
should be in relation to total income
in the economy. (2) In financing the
deficit, the federal government at-tracts
funds away from capital forma-tion
in the private sector. Federal
deficits thus tend to reduce the
supply of capital, while at the same
time increasing the demand for it.
They have been a major source of
inflation in our economy.
The proper and principal use of
money is (he consumption and
alienation of it, whereby it is
expended in making purchases.
Therefore, in itself, it is unlawful
to receive a price for the use of
money lent, which is called
—ST. THOMAS ACQUINAS
Because the anti-inflationary weap-ons
of fiscal policy are usually po-litically
unpalatable, the burden of
combatting inflation has fallen mainly
on Federal Reserve monetary policy.
The result has been recurrent periods
of tight money over the past 20 years.
Since this policy is implemented
largely by curtailing the expansion of
bank credit, the commercial banks
and their customers have been sub-
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